European Goldfields Limited
TSX : EGU
AIM : EGU

European Goldfields Limited

May 15, 2006 08:00 ET

European Goldfields: Results For Q1 2006-First Profit Reported

WHITEHORSE, YUKON--(CCNMatthews - May 15, 2006) - European Goldfields Limited (TSX:EGU)(AIM:EGU) -

PRODUCTION RAMPING-UP AT STRATONI

RESERVES ANNOUNCED FOR CERTEJ PROJECT

GREEK GOVERNMENT POSITIVE ON BUSINESS PLANS FOR SKOURIES & OLYMPIAS

OFF-TAKE AGREEMENT SIGNED FOR OLYMPIAS CONCENTRATES

European Goldfields Limited (TSX:EGU)(AIM:EGU) ("European Goldfields" or the "Company") today reports its results for the first quarter to 31 March 2006. Highlights during 2006 are:

Greece:

- Hellas Gold recorded sales of US$9.08 million and gross profits of US$4.30 million in Q1 2006, from 4 shipments of Stratoni concentrates

- Underground production at Stratoni ramping-up from 400 tonnes per day (tpd) in January to 610 tpd in April 2006

- Business plans submitted to the Greek government in January 2006, the first major step in applying for permits to develop the major projects of Skouries and Olympias

- Positive response on business plans received from Greek government, endorsing Hellas Gold's holistic and phased approach to the development of the Skouries and Olympias projects

- Off-take agreement signed for gold concentrates currently located on surface at Olympias

Romania:

- Reserves announced for Certej project, confirming that the project can produce a robust return at a gold price of $425/oz

- Environmental Impact Assessments completed; final feasibility study underway for submission to the Romanian government by year end, in support of permit application

Corporate:

- European Goldfields records first profit of US$1.04 million (before tax) for Q1 2006; US$33.95 million in cash assets and financial instruments at 31 March 2006; funded through 2007 until the expected award of permits for Olympias, Skouries and Certej

- Management team-building completed with appointments of Tim Morgan-Wynne as CFO and Neil Hepworth as VP Operations

- Broadened shareholder base and improved share liquidity; appointed Williams de Broe and RBC Capital Markets as brokers

Commenting on the results, David Reading, Chief Executive Officer of European Goldfields, said: "We are proud to report our first profit before tax in Q1 2006, and we look forward to increasing our profitability as production continues to ramp-up at Stratoni. We are also encouraged that the Greek government acknowledged the merits of our business plans and confirmed that the development of the Skouries and Olympias projects are in the best interest of the Greek economy. In Romania, we have now published reserves for the Certej project and defined a clear roadmap to permitting and project development, with final feasibility studies well underway."

GREECE

Stratoni operations - During Q1 2006, 31,752 wet tonnes of ore were mined from underground, 40,333 dry tonnes of ore were milled at the Stratoni plant and 9,884 tonnes of zinc and lead/silver concentrates were shipped and sold for total revenues of US$9.08 million, for which European Goldfields' 65%-owned subsidiary Hellas Gold S.A. ("Hellas Gold") reported a gross profit of US$4.30 million.

Ore production rates have steadily increased since the beginning of the year, from 400 tonnes per day (tpd) in January to 610 tpd in April. Ore production is on track to achieve 170,000 tonnes by year end, and is expected to increase steadily thereafter up to a maximum of 400,000 tonnes per annum by year five. Optimum recoveries of above 90% are now being achieved by the Stratoni plant.

In Q1 2006, the emphasis has been on rehabilitating and preparing sufficient mining faces to achieve the planned production target. In January, accesses to the orebody were opened on six levels. Further cleanup and rehabilitation work was carried out on the down ramp that has allowed opening of additional accesses on two additional levels. Work is also progressing in rehabilitating the 190m level access to provide exploration drilling access for the west extension of the orebody.

The first quarter also saw a substantial decrease in the inherited void inventory, with most of the backfilling of mined-out areas completed in the quarter using the coarse tailings from the milling process. To this end, a new backfill pump was purchased and installed on the 240m level to allow efficient tight filling of the operating levels above 252m level.

Cleaning and rehabilitation work at Madem Lakkos has continued to facilitate backfill of the old workings, which will reduce future water pumping and treatment costs and provide environmental benefits.

The trials of a filter press for producing filter cake from the fine portion of the mill process tailings and water treatment residue has been shown to be technically feasible and cost effective. The tender process is complete and Hellas Gold should be able to begin dry stacking these fine tails by the fourth quarter of 2006. In the meantime, Hellas Gold continues to store the tailings slurry and water treatment sludge in the Chevalier pond.

Good progress has also been made on the new decline to the Mavres Petres orebody, which is now 155 metres in, and through the bad ground associated with the footwall fault zone and the weathered ground at the portal. The decline is not necessary for mining in 2006 but becomes critical for the future production ramp-up involving the deeper portions of the orebody, as well as providing better ventilation and potential exploration upside.

Stratoni is a robust business with minimal capital investment due the extensive existing infrastructure and also has well-defined reserves over a six-year life. The project also has exciting exploration upside as the orebody is open in all directions and the new decline is transgressing the zone between old, mined-out areas and the current reserve of the Mavres Petres orebody.

The new decline has intersected lead and zinc sulphide mineralisation over a true thickness of approximately 1.75 metres located some 1.5 kilometres to the east and along strike from the Mavres Petres orebody. Significantly, this mineralisation occurs within the same marble unit as the existing reserve and, like the Mavres Petres orebody, is immediately adjacent to the Stratoni fault, indicating the potential for further zones of mineralisation to occur along the 1.5 kilometre corridor formed by the marbles and the fault. This confirms European Goldfields' current geological model for extensions to the Mavres Petres orebody. This highly prospective corridor will be drill-tested later in 2006 by a drill programme conducted from the decline.

Skouries & Olympias business plans - In January 2006, Hellas Gold submitted business plans to the Greek State for its major gold and base metal projects in Northern Greece. This submission represents a significant milestone in obtaining the permits for the Skouries and Olympias projects.

The business plans focus on a phased approach to the development of the projects with emphasis on achieving full production at the Skouries gold-copper porphyry deposit as soon as possible, and the phasing of the Olympias gold-lead-zinc-silver deposit. This approach minimises financial risk by the phased injection of capital. The principal revenue stream in the early phases will be through the sale of concentrates.

In March 2006, Hellas Gold received an official response from the Greek Ministry of Development (the "Ministry") on the business plans. The response states that the Ministry is in agreement with the principles stated in the business plans, and that the Ministry considers the business plans to be in the best interest of the Greek economy. This response was received by Hellas Gold within the timeframe provided for in its contract with the Greek State.

The response from the Ministry also has the benefit of providing a short-list of the technical matters on which the Ministry would like some further clarifications. A joint technical committee, with representatives from the Ministry, Hellas Gold and European Goldfields, has been created to resolve these matters in the context of Hellas Gold's ongoing work on a full environmental impact study, which is expected to be submitted to the Greek government in Q3 2006. On approval of the study, the environmental permits for Skouries and Olympias are expected to be issued.

Hellas Gold will then submit to the Greek government a final technical report on the Skouries and Olympias projects, which will restate the principles of the business plans and take into account any conditions detailed in the environmental permit. The mining permits are expected to be issued on approval of the technical report by the Greek government.

Ongoing feasibility work on Skouries and Olympias includes:

- The mine schedules and production plans, with sign-off from external consultants including SRK for Skouries

- An Environmental Impact Study, carried out by the Greek consulting group Enveco.

Sale of Olympias concentrates - In May 2006, Hellas Gold entered into an off-take agreement with Shandong MIC BioGold Ltd (a subsidiary of Michelago Limited of Australia (ASX: MIC)) for the initial sale of at least 18,000 wet metric tonnes (wmt) of gold bearing pyrite concentrates currently located on the surface at Olympias in Greece. The agreement also includes the possible sale of an additional 100,000 dry metric tonnes of concentrates over a three-year period from April 2007.

Olympias benefits from an existing stockpile of gold concentrates representing a reserve of about 258,000 tonnes grading 23.3 g/t gold, in addition to substantial underground reserves of gold, lead, zinc and silver.

The monthly shipments of the initial 18,000 wmt of concentrates are expected to commence in May 2006 and end in April 2007, and may be suspended if certain profitability thresholds are not met. Concentrates are to be treated at Shandong MIC's Bacox process plant in China.

The price payable for the concentrates will vary with the prevailing gold price. The agreement produces an attractive return for Hellas Gold at a gold price of US$500/oz.

European Goldfields and Hellas Gold are currently pursuing other similar opportunities for the sale of the remaining tonnage of concentrates in the Olympias stockpile.

GIS study underway - European Goldfields has undertaken to capture digitally into a geographical information system (GIS) all historical data on the licences in northern Greece. This will comprise the compilation of all existing geological and structural mapping, topographic, stream geochemistry, published regional airborne magnetics and historic drilling into a single digital database. In addition to compiling existing data, European Goldfields will acquire and process new satellite imagery over the Greek licences. The GIS database and the satellite imagery will mainly be used to refine the location and limits of existing targets along the known fault controlled corridors of marble hosted massive sulphides and northwest trending porphyry belt. The GIS database will also identify areas for further investigation by remote sensing methods, in order to generate new targets of similar mineralisation styles to Stratoni, Olympias and Skouries.

ROMANIA

Reserves announced for Certej project - In April 2006, European Goldfields announced the conversion of resources into Canadian NI 43-101 compliant reserves for its 80%-owned Certej project in the Southern Apuseni Mountains of Romania.

The reserve estimation was carried out by independent consultants RSG Global Pty Ltd ("RSG Global") and can be summarised as follows:



---------------------------------------------------------------------
Average Average
Reserve Million Gold Million Siver Million
Category Tonnes Grade (g/t) Ounces Gold Grade (g/t) Ounces Silver
---------------------------------------------------------------------
Probable 27.7 2.0 1.76 11.6 10.35
---------------------------------------------------------------------

Note: Lower cut-off grade of 0.8 g/t gold. Uniform conditioning and
based on a selected mining unit model using 6.25 X 12.5 X 2.5
metre blocks.


The reserve was estimated at a gold price of $425/oz and a silver price of $7/oz, and is based on the sale of gold rich concentrates. The estimation follows the completion of extensive metallurgical testwork, an in-house pre-feasibility study and subsequent pit optimisation and pit design work by RSG Global, which included a geotechnical drilling programme designed by Golders Associates of the UK. These studies resulted in:

- Confirmation that a flotation concentrate can be produced with high gold grades and recoveries

- An open pit with a low strip ratio of 2.6:1

- The definition of sites for infrastructure and tailings disposal

- A clear understanding of all work required to complete environmental studies and achieve all necessary permitting.

It is envisaged that the project could mine and process 3.0 Mt per annum over at least nine years. At the proposed production rates, this would yield approximately 249,000 tonnes of concentrate per annum with grades averaging 21 g/t gold and 125 g/t silver, with a flotation gold recovery of approximately 88%. This translates into an annual production of approximately 170,000 oz of contained gold in the concentrate.

The conversion of resources into reserves means that the project can support the necessary capital investment and produce a robust return at a gold price of $425/oz and above.

On-site production of gold dore being investigated - European Goldfields is also actively reviewing other development options to progress the Certej project forward, such as confirming a process route for producing gold dore on site.

Of the available techniques, the Albion Process followed by cyanidation is considered the most promising. The Albion process is a combination of ultra-fine grinding and oxidatative leaching at atmospheric pressure. Hydrometallurgy Research Laboratories of Australia has completed Stages I and II of a metallurgical testwork programme utilising the Albion Process from samples of flotation concentrates produced from Certej ore. The results indicate that the concentrate can be economically processed by the Albion Process to produce gold dore on site, with recoveries of gold and silver averaging approximately 84% and 93% respectively.

European Goldfields expects to report on the results of a Stage III pilot plant scale continuous metallurgical testwork programme, and publish Canadian NI 43-101 compliant reserves based on the Albion process later in Q2 2006.

Final feasibility study underway - European Goldfields has completed the necessary Environmental Impact Assessments (EIA Levels I and II) for the Certej project. The next stage will be to complete an Environmental Impact Study (EIS) in order to progress to full feasibility study and permit application by year end. ECOIND, a Romanian company with a well-proven track record in environmental research and permitting procedures, have been employed to assist in this process. Cepromin, a Romanian company, has been commissioned to assist in producing the feasibility study and supporting documents.

Generative study initiated - European Goldfields has initiated a generative study on its licensed areas in Romania by engaging the services of an internationally renowned expert in structural controls and epithermal mineralisation. The work will comprise a field visit and review of all exploration data. The objective of the work is to develop existing geological models and identify drill targets along extension zones to known mineralisation and possible blind targets.

Resources & reserves parameters

For additional information on the resource and reserve estimates quoted in this news release, please refer to the Company's Resources & Reserves Declaration at www.egoldfields.com/goldfields/resources.jsp. Patrick Forward, General Manager, Exploration of the Company, was the Qualified Person under Canadian National Instrument 43-101 responsible for reviewing the disclosure of resource and reserve estimates quoted in this news release.

Forward-looking statements

Certain information included in this news release, including any information as to the Company's future financial or operating performance and other statements that express management's expectations or estimates of future performance, constitute "forward-looking statements". The words "expect", "will", "intend", "estimate" and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. The Company cautions the reader that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual financial results, performance or achievements of the Company to be materially different from its estimated future results, performance or achievements expressed or implied by those forward-looking statements and the forward-looking statements are not guarantees of future performance. These risks, uncertainties and other factors include, but are not limited to: changes in the worldwide price of gold, base metals or certain other commodities (such as fuel and electricity) and currencies; the successful and timely permitting of the Company's Skouries, Olympias and Certej projects; legislative, political, social or economic developments in the jurisdictions in which the Company carries on business; operating or technical difficulties in connection with mining or development activities; the speculative nature of gold and base metals exploration and development, including the risks of diminishing quantities or grades of reserves; and the risks normally involved in the exploration, development and mining business. These factors are discussed in greater detail in the Company's Annual Information Form for the year ended 31 December 2005, filed on SEDAR at www.sedar.com. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.



MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2006


The following discussion and analysis, prepared as at 15 May 2006, is intended to assist in the understanding and assessment of the trends and significant changes in the results of operations and financial conditions of European Goldfields Limited (the "Company"). Historical results may not indicate future performance. Forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from those contemplated by these statements. The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements for the three-month periods ended 31 March 2006 and 2005 and accompanying notes (the "Consolidated Financial Statements").

Additional information relating to the Company, including the Company's Annual Information Form, is available on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. Except as otherwise noted, all dollar amounts in the following discussion and analysis and the Consolidated Financial Statements are stated in United States dollars.

Overview

The Company, a company incorporated under the Yukon Business Corporations Act, is a resource company involved in the acquisition, exploration and development of mineral properties in Greece, Romania and the Balkans.

The Company's Common Shares are listed on the AIM Market of London Stock Exchange plc and on the Toronto Stock Exchange (TSX) under the symbol "EGU".

Greece - The Company holds a 65% interest in Hellas Gold S.A. ("Hellas Gold"). Hellas Gold owns assets in northern Greece which consist of three deposits within 70-year mining concessions covering a total area of 317 km2. The deposits include the polymetallic projects of Stratoni and Olympias which contain gold, lead, zinc and silver, and the copper/gold porphyry body referred to as Skouries. All three deposits have been well defined with over 200,000 metres of drilling and the completion of feasibility studies and later engineering studies.

The total proven and probable reserves of these assets are 7.6 Moz gold, 65.8 Moz silver, 0.7 Mt copper, 0.7 Mt lead and 0.9 Mt zinc, from a measured and indicated resource base of 9.4 Moz gold, 74.5 Moz silver, 1.0 Mt copper, 0.8 Mt lead and 1.1 Mt zinc (65% attributable).

These assets represent some of the largest defined deposits in Europe. The three deposits are located within a 10 km radius of each other, making this effectively a gold and base metals centre. Furthermore, both Stratoni and Olympias were previously in production and have extensive existing mining and plant infrastructure and a ship-loading facility on the Aegean Sea.

Hellas Gold's assets also include revenue-generating stockpiles of gold concentrates.

In September 2005, Hellas Gold resumed production at Stratoni following the award by the Greek State of all necessary environmental and mining permits. Hellas Gold is in the process of applying for similar permits for Olympias and Skouries, having met its first milestone by submitting business plans to the Greek government in January 2006.

Romania - The Company holds four mineral properties located within the "Golden Quadrilateral" area of Romania. The Company recently announced the conversion of resources into Canadian National Instrument 43-101 compliant reserves for its 80%-owned Certej project, underpinning the value of the project. The Certej deposit hosts probable reserves of 27.7 Mt grading 2.0 g/t gold and 11.6 g/t silver for 1.76 Moz gold and 10.35 Moz silver (80% attributable). The Company is now completing a final feasibility study for submission to the Romanian government by the end of 2006, in support of an application for environmental and mining permits to develop the Certej project.

Results of operations

The Company's results of operations for the three-month period ended 31 March 2006 were comprised primarily of activities related to the results of operations of the Company's 65%-owned subsidiary Hellas Gold in Greece and the Company's regional exploration programs in Romania. The Company currently incurs losses and until significant revenues are generated, the Company will continue to do so.

In September 2005, Hellas Gold commenced production at its Stratoni mine in Greece. The following table summarises operational results at Stratoni for the three-month period ended 31 March 2006.



---------------------------------------------------------------------
Stratoni Mine (Greece)
---------------------------------------------------------------------
Three-month period ended
31 March 2006
---------------------------------------------------------------------
Inventory (start of period)
Ore mined (wet tonnes) 10,963
Zinc concentrate (tonnes) 95
Lead/silver concentrate (tonnes) 1,268

Production
Ore mined (wet tonnes) 31,752


Ore milled (tonnes) 40,333
- Average grade: Zinc (%) 8.89
Lead (%) 7.28
Silver (g/t) 183.45

Zinc concentrate (tonnes) 6,222
- Containing: Zinc (tonnes) 3,229

Lead concentrate (tonnes) 3,662
- Containing: Lead (tonnes) 2,667
Silver (kg) 6,454

Sales
Zinc concentrate (tonnes) 5,283
- Containing payable: Zinc (tonnes)(i) 2,335

Lead concentrate (tonnes) 4,623
- Containing payable: Lead (tonnes)(i) 3,166
Silver (kg)(i) 7,855

Operating costs per tonne milled ($) 96
Operating costs per unit of payable:
- Zinc ($) 744
- Lead ($) 496
- Silver ($) 130

Inventory (end of period)
Ore mined (wet tonnes) 1,155
Zinc concentrate (tonnes) 1,034
Lead/silver concentrate (tonnes) 307

Financial information (in thousands of US dollars)
Sales ($) 9.083
Gross profit ($) 4,295
Capital expenditure ($) 526
Amortisation and depletion ($) 454
---------------------------------------------------------------------
(i) Net of smelter deductions



The Company's results of operations for the eight most recently
completed quarters are summarised in the following table:

---------------------------------------------------------------------
(in thousands
of US dollars, 2006 2005 2005 2005
except per Q1 Q4 Q3 Q2
share amounts) $ $ $ $
---------------------------------------------------------------------
Statement of loss
and deficit
Sales 9,083 1,464 - 57
Cost of sales 4,788 1,367 - -
Gross profit 4,295 97 - 57
Interest income 300 339 272 326
Expenses 3,558 5,079 3,536 2,287
Profit/(loss) before
income tax 1,037 (4,643) (3,264) (1,904)
Profit/(loss) after
income tax 161 (4,251) (3,729) (846)
Non-controlling interest (475) 58 (1,003) (123)
Loss for the period 314 4,309 2,726 723
Loss per share 0.00 0.04 0.02 0.01
Balance sheet
Working capital 34,515 33,765 39,171 49,544
Total assets 274,381 266,618 295,914 298,948
Non current liabilities 64,684 62,807 70,053 71,056
Statement of cash flows
Deferred exploration
and development costs
- Romania 848 1,081 1,067 893
Plant and equipment
- Greece 568 1,298 2,506 2,453
Deferred development
costs - Greece 478 1,510 439 891
---------------------------------------------------------------------

---------------------------------------------------------------------
(in thousands
of US dollars, 2005 2004 2004 2004
except per Q1 Q4 Q3 Q2
share amounts) $ $ $ $
---------------------------------------------------------------------
Statement of loss
and deficit
Sales - - - -
Cost of sales - - - -
Gross profit - - - -
Interest income 326 279 143 60
Expenses 3,831 9,225 2,854 2,848
Profit/(loss) before
income tax (3,505) (8,946) (2,164) (3,554)
Profit/(loss) after
income tax (2,793) (8,669) (2,190) (3,580)
Non-controlling interest (141) (535) - -
Loss for the period 2,652 8,134 2,190 3,580
Loss per share 0.02 0.17 0.05 0.09
Balance sheet
Working capital 57,285 63,480 29,045 31,117
Total assets 300,689 305,541 86,879 83,517
Non current liabilities 71,179 72,103 - -
Statement of cash flows
Deferred exploration
and development costs
- Romania 860 2,462 1,172 943
Plant and equipment
- Greece 1,582 - - -
Deferred development
costs - Greece - - - -
---------------------------------------------------------------------

The breakdown of deferred exploration and development costs per
mineral property for the three-month periods ended 31 March 2006 and
2005 is as follows:

Three-month periods ended 31 March
----------------------------------
2006 2005
(in thousands of US dollars) $ $
---------------------------------------------------------------------
Romanian mineral properties
Certej 772 (91%) 685 (80%)
Cainel 17 (2%) 102 (12%)
Voia 42 (5%) 17 (2%)
Baita-Craciunesti 17 (2%) 40 (5%)
Bolcana - (-%) 16 (1%)
---------------------------------------------------------------------
848 (100%) 860 (100%)
---------------------------------------------------------------------
Greek mineral properties
Stratoni - (-%) - (-%)
Skouries 162 (34%) - (-%)
Olympias 316 (66%) - (-%)
---------------------------------------------------------------------
478 (100%) - (-%)
---------------------------------------------------------------------
Total 1,326 (100%) 860 (100%)
---------------------------------------------------------------------


The Certej exploitation licence and the Baita-Craciunesti exploration licence are held by the Company's 80%-owned subsidiary, Deva Gold S.A. ("Deva Gold"). Minvest S.A. (a Romanian state owned mining company), together with three private Romanian companies, hold the remaining 20% interest in Deva Gold and the Company holds the pre-emptive right to acquire such 20% interest. The Company is required to fund 100% of all costs related to the exploration and development of these properties. As a result, the Company is entitled to the refund of such costs (plus interest) out of future cash flows generated by Deva Gold, prior to any dividends being distributed to shareholders. The Voia and Cainel exploration licences are held by the Company's wholly-owned subsidiary, European Goldfields Deva SRL.

The Company recorded a first profit (before tax) of $1.04 million for the three-month period ended 31 March 2006, compared to a loss (before tax) of $3.51 million for the same period of 2005. The Company incurred a net loss (after tax and non-controlling interest) of $0.31 million ($0.00 per share) for the three-month period ended 31 March 2006, compared to a net loss of $2.65 million ($0.02 per share) for the same period of 2005. The following factors have contributed to this reduction in net loss and first profit (before tax) in Q1 2006:

- Hellas Gold commenced production at its Stratoni mine in September 2005. As a result, the Company recorded $4.30 million in gross profit on revenues of $9.08 million in Q1 2006 for the sale of concentrates by Hellas Gold, compared to $Nil for the same period of 2005. Cost of sales of $4.79 million included non-recurring costs relating to the start-up of operations at Stratoni, fixed costs disproportionate to production output in a ramp-up phase, and $0.45 million in amortisation and depletion expenses.

- The Company's corporate administrative and overhead expenses have decreased significantly from $0.89 million in Q1 2005, to $0.53 million for the same period of 2006, primarily as a result of the Company recharging a larger portion of its overhead costs to its operating subsidiaries, a portion of which is capitalised by such subsidiaries.

- The Company recorded a non-cash equity-based compensation expense of $0.67 million in Q1 2006, compared to $0.13 million for the same period of 2005. This increase is due to the larger cost recognised in Q1 2006 related to outstanding restricted share units and share options during the quarter, compared to the same period of 2005. In Q1 2005, there were no restricted share units and fewer share options outstanding which had not been fully expensed. In Q1 2006, the Company continued a practice of recharging some of its equity-based compensation expense to its operating subsidiaries, a portion of which is capitalised by such subsidiaries.

- Effective 1 October 2004, the Company changed its functional currency from the Canadian dollar to the United States dollar. Despite this, during Q1 2005, the Company retained significant cash balances in Euro in order to meet a Euro subscription obligation in Hellas Gold. Hellas Gold also retained significant cash balances in Euro in order to meet operating, administrative and overhead expenses. Consequently, the Company recorded a foreign exchange loss of $1.00 million in Q1 2005. The loss resulted primarily from a strengthening of the United States dollar against the Euro as at 31 March 2005 compared to 31 December 2004. In contrast, the Company realised a foreign exchange gain of
$0.02 million Q1 2006.

- In Q1 2006, Hellas Gold's administrative and overhead expenses amounted to $0.74 million, compared to $0.61 million for the same period of 2005. Hellas Gold's administrative and overhead expenses are mostly attributable to operations related to the Stratoni mine and plant, and have increased moderately in Q1 2006 compared to the same period of 2005 reflecting an increase in activity following the commencement of operations in September 2005.

- In Q1 2006, Hellas Gold incurred an expense of $0.49 million, compared to $0.96 million for the same period of 2005, for ongoing water pumping and treatment at its non-operating mines of Olympias and Stratoni (Madem Lakkos), in compliance with Hellas Gold's commitment to the environment under its contract with the Greek State.

- In Q1 2006, Hellas Gold incurred a non-recurring expense of $0.90 million, compared to $Nil million for the same period of 2005, for the maintenance of old adits and equipment at Stratoni.

- The Company recorded a charge for income taxes of $0.88 million in Q1 2006, compared to a credit of $0.71 million for the same period of 2005. The charge in Q1 2006 has arisen due to the Company recording a profit (before tax) which led to a reduction in the future tax asset based on losses carried forward in Hellas Gold. The credit in Q1 2005 has arisen due to the Company recognising a future tax asset for the losses carried forward in Hellas Gold.

- The Company recorded a charge of $0.48 million in Q1 2006 relating to the non-controlling shareholder's interest in Hellas Gold's profit (after tax) for this period, compared to a credit of $0.14 million for the same period of 2005, relating to the non-controlling shareholder's interest in Hellas Gold's loss (after tax) for this period.

Liquidity and capital resources

As at 31 March 2006, the Company had cash and cash equivalents of $30.34 million, compared to $30.54 million as at 31 December 2005, and working capital of $34.52 million, compared to $33.77 million as at 31 December 2005.

The small decrease in cash and cash equivalents as at 31 March 2006, compared to the balances as at 31 December 2005, resulted primarily from a net increase in accounts receivable vs. accounts payable ($1.90 million), deferred exploration and development costs in Romania ($0.85 million), capital expenditure in Greece ($0.57 million), deferred development costs in Greece ($0.48 million) and purchase of equipment ($0.04 million), offset by operating profits ($2.11 million), a decrease in inventory ($1.00 million), interest earned ($0.30 million), the effects of foreign currency translation on cash ($0.17 million), and the proceeds received from the exercise of share options ($0.06 million).

The following table sets forth the Company's contractual obligations including payments due for each of the next five years and thereafter:



Payments due by period
(in thousands of US dollars)
---------------------------------------------------------------------
Contractual obligations Less than After
Total 1 year 1 - 3 years 4 - 5 years 5 years
---------------------------------------------------------------------
Operating lease
(London office) 887 187 373 327 -
Exploration licence
spending commitments
(Voia, Romania) 1,415 - 1,415 - -
---------------------------------------------------------------------
Total contractual
obligations 2,302 187 1,788 327 -
---------------------------------------------------------------------


In 2006, the Company expects to spend a total of (i) $12.80 million in capital expenditures to fund the development of its projects of Stratoni ($11.05 million), Olympias ($1.75 million), Skouries ($Nil) and Certej ($Nil), (ii) $6.63 million in exploration and development costs for Greece ($4.05 million) and Romania ($2.58 million), and (iii) $3.39 million on corporate administrative and overhead expenses. The Company expects to fund such costs from existing cash balances and operating cash flow generated at Stratoni.

Outstanding share data

The following represents all equity shares outstanding and the number of common shares into which all securities are convertible, exercisable or exchangeable:



Common shares: 113,847,876
Common share options: 3,145,999
Restricted share units: 1,650,000
-----------
Common shares (fully-diluted): 118,643,875

Preferred shares: Nil


Outlook

Greece - In September 2005, Hellas Gold resumed production at Stratoni following the award by the Greek State of all necessary environmental and mining permits. Production of ore is expected to reach 170,000 tonnes by the end of 2006, steadily increasing to 400,000 tonnes per annum by year five.

In January 2006, Hellas Gold submitted business plans to the Greek government for its major gold and base metals projects of Skouries and Olympias. This submission represents a significant milestone in obtaining the necessary environmental and mining permits to develop the projects.

In April 2006, the Company announced that Hellas Gold had received an official response from the Greek Ministry of Development (the "Ministry") on the business plans. The response states that the Ministry is in agreement with the principles stated in the business plans, and that the Ministry considers the business plans to be in the best interest of the Greek economy.

With this response, the Ministry endorses Hellas Gold's holistic and phased approach to the development of the projects, with emphasis on achieving full production at the Skouries gold-copper porphyry deposit as soon as possible, and the phasing of the Olympias gold-lead-zinc-silver deposit. This approach minimises financial risk by the phased injection of capital. The principal revenue stream in the early phases will be through the sale of concentrates.

Hellas Gold is now focused on completing a full environmental impact study, which is expected to be submitted to the Greek government in Q3 2006. On approval of the study, the environmental permits for Skouries and Olympias are expected to be issued.

Hellas Gold will then submit to the Greek government a final technical report on the Skouries and Olympias projects, which will restate the principles of the business plans and take into account any conditions in the environmental permit. The mining permits are expected to be issued on approval of the technical report by the Greek government.

The Company also continues to look for new discoveries through focused exploration programmes.

Romania - In April 2006, the Company announced the conversion of resources into Canadian National Instrument 43-101 compliant reserves for its 80%-owned Certej project, underpinning the value of the project. Studies confirm that a gold/silver flotation concentrate can be produced with high grades and recoveries.

In addition, the Company is pursuing a metallurgical testwork programme investigating the feasibility of producing gold dore on site by a cost effective process design.

Environmental Impact Assessments (EIA Levels I and II) were completed in December 2005. The next stage will be to complete an Environmental Impact Study (EIS) in order to progress to full feasibility study by the end of 2006, permit application and project development.

Finally, the Company continues to conduct focused exploration programmes to expand the resource base in Romania.

Risks and uncertainties

The risks and uncertainties affecting the Company, its subsidiaries and their business are discussed in the Company's Annual Information Form for the year ended 31 December 2005, filed on SEDAR at www.sedar.com.

Block admission application

A block admission application has been made for up to 16,346,230 common shares without par value in the Company to be admitted to trading on the AIM Market of London Stock Exchange plc. The block admission application is in respect of shares that may be issued pursuant to the exercise of options under the Company's Share Option Plan and the vesting of restricted share units under the Company's Restricted Share Unit Plan. The block admission is expected to become effective on 16 May 2006.

Documents sent to shareholders

Copies of the Company's Annual Report, Management's Discussion and Analysis and Consolidated Financial Statements for the year ended 31 December 2005, and copies of the Notice of Meeting and Management Proxy Circular for the Annual Meeting of shareholders of the Company to be held on 15 May 2006 have been sent to shareholders and filed on SEDAR at www.sedar.com.

Contact Information